Practical Ecommerce

Credit Card Processing: Don’t Be Seduced by Teaser Rates

Editor’s Note: Contributor Phil Hinke is a veteran of the credit card processing industry. He now consults with merchants to help them lower their processing costs, believing the credit card industry is often unfair to them. His latest installment is below.

In “Durbin Amendment May Foster Deceptive Credit, Debit Processing Fees,” my June 2011 article, I predicted an abundance of deceptive sales and marketing tactics by some merchant account providers as a result of the Durbin Amendment, which lowers the interchange rate for many debit card transactions. Well, I have never seen more deception and trickery in the industry than I’m seeing now.

Beware of Teaser Rates

Unknowing merchants are seduced by teaser rates every day. Teaser rates are not new to the card processing industry. They have just become more absurd. I have seen marketing materials promising processing for as low as 0.39 percent. That is not 0.39 percent over interchange and pass-through fees. It’s 0.39 percent in total — plus an accompanying transaction fee, which the providers do not mention. The provider presumably wants to seduce an unknowing merchant into believing he is receiving a great rate when in fact the rate in this case only applies to regulated — i.e. Durbin Amendment — debit cards. (Note: The Durbin Amendment applies only to banks with more than $10 billion in assets. Banks with fewer than $10 billion in assets do not have to follow Durbin’s’ debit-card-rate requirement. Thus, banks with more than $10 billion in assets have “regulated” debit card rates. For other banks, the debit card rates are “unregulated.”) The providers can offer this rate because they know the maximum legal interchange rate — the wholesale cost, essentially — for regulated debit transactions is only 0.05 percent + $0.22 per transaction.

I have also seen marketing materials promising rates as low as 0.99 percent processing costs for credit cards. It’s a similar game. The rate is likely limited to regulated debit cards and basic credit cards. Here they lose money on the basic credit card, but make up most or all of the money on the regulated debit card. However, the real money is made on all the surcharging for the other card types — reward cards, corporate cards — which will typically be the majority of the transactions.

Basic Card-Processing Knowledge Necessary

A basic knowledge of card processing, with a little common sense, is the best defense against teaser rates. Here are a couple key pieces of information to know when confronted with teaser rates or when otherwise discussing rates with a provider.

  1. Understand the “wholesale” rates. Every merchant account provider pays the same “wholesale rate, ” which includes interchange, dues and assessments, access fees, and cross-border fees. If a salesperson tells you that his company receives a better wholesale rate from card companies because of the provider’s size or other reason, that should be a red flag.

  2. Know the interchange rates. Remember these three interchange rates, as they will appear frequently on merchant account statements for ecommerce merchants:

    • Regulated debit cards: Maximum of 0.05 percent plus $0.22 per transaction;
    • “Visa eCommerce Basic” credit card: 1.80 percent + $0.10 per transaction;
    • “Visa Rewards 2″ credit card: 1.95 percent + $0.10 per transaction.

Look for a Consistent Mark-up

When discussing rates with salespeople, always have them write down what rate and transaction fee(s) you would be charged for the majority of your transactions. For ecommerce merchants, many transactions will be charged at (a) a regulated Visa debit card, (b) a Visa credit card at the “eCommerce Basic” interchange rate, and (c) a “Visa Rewards 2″ credit card. Subtract the appropriate interchange rate — shown above — from the three rates and transaction fees they provide you. Look for consistency in the difference, which is the mark-up.

If the provider knows your business has a high percentage of debit card transactions (say 70 percent of all your transactions) and a low percentage of basic credit card transactions (say 2 percent of all your transactions) then the teaser rate may be applied on the “eCommerce Basic” cards. Here a provider may offer the 0.99 percent rate plus, perhaps, a $0.20 transaction fee. This may look enticing because the eCommerce Basic interchange rate is 1.80 percent + $0.10 per transaction. However, the provider will likely charge the same rate and transaction fee on the regulated debit transactions; 0.99 percent + $0.20 per transaction is a horrible rate considering the interchange rate is only 0.05 percent + $0.22.

Furthermore, the provider may also charge the non-regulated debit card transactions — from banks with less than $10 billion in assets — and all the other credit cards by an extra 1 to 2 percent above interchange. Therefore, you may be paying over 3 percent on the “Visa Rewards 2″ transaction. Bottom line, with this teaser rate you may be receiving a great rate on 2 percent of your transactions and a terrible rate on the other 98 percent.

Summary

Remember the following points when evaluating credit-card-processing proposals that include teaser rates.

  1. All merchant account providers pay the same wholesale price — i.e. the “interchange” rate — to the card companies and issuing banks.
  2. Know the three interchange rates, above.
  3. Look for mark-up consistency.
  4. Use common sense.

Phil Hinke
Phil Hinke
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Comments ( 6 )

  1. tekgems January 12, 2012 Reply

    > Regulated debit cards: Maximum of 0.05 percent plus $0.22 per transaction;

    Can you explain this please? Dodd-Frank w/ Durbin amendment states that the rate only affect banks that have $10 billion or more in assets (aka as a "big bank"). If a bank has less than $10 billion in assets, then they are exempt from this rate.

    So, as a merchant, I use a payment processor. Merchant pays payment processor. Payment processes uses a bank. That bank talks to the other bank. If the other bank is a "big bank" the payment processor gets the regulated rate? What does this have to do with the merchant? Don’t we get the rate we negotiate with the processor, regardless of what the processor pays for interchange?

  2. philhinkePEC January 12, 2012 Reply

    Tekgems, With teaser rates you get the rate written on the contract but it’s only good for a very limited number of card types – say debit cards or basic credit cards. If the merchant goes into the contract there are higher rates and probably surcharges on the most common card types (reward cards, etc) the merchant will accept.

    Regarding Durbin, interchange rate is based on the bank that issued the debit card your customer uses. If your customer has a big bank Visa debit card, than the interchange rate is 0.05% + $0.22. If the customer has a Visa debit card from his smaller local bank than the interchange is 1.60% + $0.15 for an ecommerce sale. Providers who offer teaser rates know that there are 100’s of interchange rates and they use that knowledge to make the merchant think they are gettting a good rate when in fact the so called good rate only applies to one or a few card types and the provider increases or surcharges the rate on the card types the merchant may accept more often.

  3. tekgems January 12, 2012 Reply

    As long as you can negotiate a monthly contract, or a low ETF, you could save on processing costs, then dump them. I know what you mean about these sharks. I’ve been through several merchant accounts over the years…. Except for one merchant account, all the other accounts, were disappointingly deceptive. Makes you just want to use PayPal merchant processing or some other simplified fee structure.

  4. Ron Gross January 12, 2012 Reply

    I wonder if you guys ever heard of Bitcoin. It’s a new online p2p currency that has extremely low processing fees (around 0.01% percent), and no charge-backs. It’s a new revolution that’s happening, that currently only geeks understand, but will take the world by storm over the next few years.

    Here are a few links if you’re interested:

    http://www.weusecoins.com/
    https://bit-pay.com/
    http://bitcoin.org/
    http://bitcoin.stackexchange.com/questions/126/how-can-i-accept-bitcoins-on-my-website

  5. Ben Dwyer January 17, 2012 Reply

    The Durbin Amendment was flawed from the start, and it was bound to create a windfall for merchant service providers. We sent a release warning merchants before the amendment even took effect: http://www.cardfellow.com/blog/durbin-amendment-bundled-tiered/

    The way businesses currently shop for a merchant service provider is backwards. Providers expect a business to divulge statements, volume, ticket size, etc. so that they can extract the maximum amount of profit. It’s a frustrating game of cat and mouse. Providers should offer the best rate first for a given business based on general details and risk profile. It’s certainly possible, in fact, it’s easy. That’s exactly the way CardFellow functions, and thousands of quotes a month are placed through our marketplace — best rates first, all pass-through pricing.

    The competition in the processing industry is ridiculous. Business owners can harness the competition and use it to their advantage. It’s simple — here’s how to "shop" for a merchant account:

    1.) Don’t ask a provider for its rates, fees, etc. — demand what you want
    2.) Demand pass-through pricing
    3.) Refuse to pay an early termination fee
    4.) Demand a completely populate application and agreement for review, and check page numbers and external references to ensure all documentation has been provided.
    5.) Demand that the processor provide an addendum in writing that clearly outlines for how long the rates/fees (markup over interchange) will be honored — i.e. how long before rates increase. Providers will be quick to say that they can’t provide a guarantee, but that’s not true. Providers make this guarantee all the time in our marketplace, and we audit statements to ensure they stick to the agreement. There hasn’t been an issue yet.

  6. James Stein January 18, 2012 Reply

    Card issuers sent out 4 billion credit card offers by mail last year, 3 times as many as the 2009 total, according to data from Synovate. These numbers are not really surprising, as the improvement in the economy was expected to restore the banks’ willingness to hand out new credit. What is surprising is how far most issuers are willing to go in doing so.

    The very high overall quality of the offers, with incredible sign-up bonuses and rewards programs, makes one wonder whether the issuers are really that desperate to attract new customers or are they actually forced to be so generous, because Americans are just not all that interested in what they have to offer. http://blog.unibulmerchantservices.com/americans-get-4b-new-credit-card-offers-in-2011-but-are-we-interested

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